A Reflection on Postwar Neoclassical Economics: The Shift from General Equilibrium Theory to the New Microeconomic Theories

The theoretical focus of neoclassical economics experienced a significant change in the 1970s–1980s. General equilibrium theory lost its dominant position in theoretical economic studies, with its role of setting the research agenda taken over by what this article calls the “new microeconomic theories,” principally decision theory, game theory, and mechanism design. Mainstream economists, post-Keynesians, and historians of economic thought each give a different explanation of the hows and whys of that change, but all miss some critical methodological implications. That change, as this article discusses, shows that neoclassical economics has turned from “grand theory” toward “small models” with empirically delimited utility and that the ideology of marketism lacks a valid scientific foundation. This interpretation can help illuminate the deeper dynamics of the postwar development of neoclassical economics and provide insights for a new political economy that can come to grips with political-economic practices that cannot be fully grasped by the neoclassical tradition.